Tech Earnings: S&P's Q1 Outlook

Analysts tell what to expect from key industries within the sector—and name their favorite companies in each

by Pearl Wang From Standard & Poor's Equity Research

Standard & Poor's Equity Research expects the technology sector, generally, to report solid first-quarter results as profits are released in the coming weeks. However, S&P sees technology companies giving measured forward guidance, due to economic uncertainties reflecting a slowing U.S. economy, challenges in housing and lending, and seasonal factors.

As of yearend 2006, S&P analysts were looking for first-quarter tech sector profits to rise 14.4%. As economic growth has slowed, we now forecast an increase of 9.3%. Despite our more measured outlook, we believe growth for the sector will outpace that of the S&P 500 as a whole.

"Areas of particular concern for the technology sector include handsets and computers, especially given the recent adverse pre-announcements from companies like Motorola (MOT; S&P investment rank: 4 STARS, buy), Sanmina-SCI (SANM; 3 STARS, hold), and Seagate (STX; 4 STARS)," says Scott Kessler, who heads Standard & Poor's technology equity analysis group.

Here is an industry breakdown of S&P Equity Research's expectations for the sector:

HARDWARE

Kessler believes that Apple's (AAPL; 5 STARS, buy) guidance for the just-concluded quarter was conservative. He expects Apple to continue to gain market share in its desktop and notebook markets, as well as benefit from new products launched in 2007.

INTERNET SOFTWARE & SERVICES

S&P foresees good results from large-cap Internet companies eBay (EBAY; 5 STARS), Google (GOOG; 3 STARS), and Yahoo! (YHOO; 2 STARS, sell). For eBay, listings and revenue per listing have been tracking favorably, and advertising revenues will likely help first-quarter results and forward guidance, says Kessler. Google continued to gain share and should deliver strong results, notwithstanding greater competition from Yahoo's Panama advertising system. S&P sees Panama helping Yahoo's results, but Kessler thinks this is likely already priced into the shares.

SOFTWARE

S&P enterprise software analyst Zaineb Bokhari expects her companies to exhibit normal seasonality for the first quarter, with license and total revenues entering a slower growth period.

Currently, Bokhari has a strong buy on Oracle (ORCL; 5 STARS). Buy recommendations include BEA Systems (BEAS; 4 STARS), Lawson Software (LWSN; 4 STARS), and Business Objects (BOBJ; 4 STARS).

S&P software analyst Jim Yin does not see much upside this quarter, due to a weaker economy and the seasonally slower first quarter. But he expects several CAD/CAM (computer-aided design/computer-aided manufacturing) companies, including ANSYS (ANSS; 3 STARS), Parametric (PMTC; 4 STARS), and Autodesk (ADSK; 4 STARS), to report strong results. Yin is more cautious on companies that focus primarily on software security, due to increased competition from Microsoft (MSFT; 3 STARS) with the launch of Windows Vista.

Software companies that have greater exposure to the U.S. markets could also offer more cautious updates, due to a possible slowdown in the U.S. economy.